Reinsurance Focus

Transatlantic Reinsurance Company (“TRC”), a reinsurer on non-standard automobile insurance policies, and Home State County Mutual Insurance Company (“Home State”) (the ceding and fronting carrier) sued Gamma Group, the agent responsible for binding and adjusting the policies, for breach of contract. The trial court concluded that Gamma breached its contract by failing to factor the run-off into its commission adjustment and instead retaining the premiums from which the adjusted commission payments were to be made.

Gamma appealed the trial court’s judgment arguing: (1) that the trial court erred in awarding damages under the contract because losses and loss adjustment expenses on run-off claims should not have been included in the commission adjustment; and (2) that the court erred in awarding statutory attorney’s fees. In a cross-appeal, TRC and Home State argued that the court erred when it construed the contract to imply that only “reasonable” run-off payments were to be included in the commission adjustment calculation.

The Texas Court of Appeals affirmed the trial court’s judgment on the right to recover damages for breach of contract and attorney’s fees, but reversed the trial court’s judgment with respect to the amount of damages reasoning that the trial court erred by reducing the damage award based on an implied term in the contract. The court stated that “[c]ourts do not rewrite contracts to insert provisions parties could have included or imply restraints for which they did not bargain,” and concluded that “[a]lthough the trial court refer[red] to its determination as a contract construction, it …, in effect, inserted an implied covenant requiring that loss payments be reasonable. Gamma Group, Inc. v. Transatlantic Reinsurance Co. & Home State County Mutual Ins. Co., No. 05-06-00156, (Tex. Ct. App., Dec. 3, 2007).

This post written by Lynn Hawkins.